Canadian Lawyers Serving Domestic and International Clients Since 1965

Purchase of Real Property and the “Lawyer Approval” Clause

In recent years, some Canadian cities have experienced a dynamic shift in their housing market. Market factors such as a strong global economy, an increased desire amongst foreign buyers to own Canadian real property, the influx of out of province Canadians moving to larger cities, property supply shortages, the popularization of home sharing services such as Airbnb and short-term rental housing, to name a few, have all contributed to the rapid increase in housing prices, well beyond historical norms.

However, efforts are under way, effecting cities such as Toronto and Vancouver. Various levels of Government are trying to directly tackle the issues causing housing shortages, by implementing policies such as the foreign buyer’s tax, the empty homes tax, a 30-day priority purchase status to Vancouver residents for pre-sale condos and the enhancement of limits on rent increases. Beyond that, the courts are tightening loopholes heavily relied on in the past, for spuriously setting aside Contracts of Purchase and Sale, where a party is motivated to do so, as a result of changes in market pricing.

In the recent British Columbia Supreme Court case of Zhang v Amaral-Gurgel, a significant decision was made regarding the too often relied on ‘lawyer approval’ clause, in the context of a residential property sale contract.

The case was brought by the buyers, claiming that the Seller was bound by the purchase contract, for the sale of a West Vancouver residential property. The defendant had relied on a “lawyer approval” clause as a way to get out of the contract. The relied upon clause stated that the Contract of Purchase and Sale was:

“Subject to the Seller’s legal representative/lawyer approving the terms and conditions of the contract on or before October 17, 2016. This contract is for the sole benefit of the Seller. …”

There is a perception, often relied on, that this type of clause gives a party legitimate way out of what would otherwise be a binding or firm contract. Moreover, these clauses are often drafted in overly broadly and encompassing language, with the sole intention of being vague in order to benefit one party, and in effect, impose risks on the other party. In practice, these clauses allow one side the opportunity to pull out of a contract for a wide range of reasons. In essence, the contract becomes and option.

However, in Zhang v Amaral-Gurgel the Court took a firm stance on the use and abuse of such “lawyer approval” clauses. The Supreme Court of British Columbia held that the defendant Seller, in purporting to rely on the lawyer’s approval condition to consider and accept a subsequent competing offer, failed to act in good faith and was in breach of her contract with the plaintiffs. The intention of the parties, as expressed in the contract, were that the Seller would sell the property to the Buyer, subject only to her obtaining legal advice on the terms and conditions of that contract. That intention therefore, could not be interpreted to include or extend to the Seller seeking advice on or considering the relative merits of another offer that was received only after the initial contract was signed.

The court held that the lawyer’s approval condition was limited by the language used to include only the “terms and conditions of the contract”. However, the second key implication of this case was the application of the principle of acting in good faith in contractual dealings, first outlined in Bhasin v. Hrynew. The Court in that case, crafted a new substantive doctrine of honest contractual performance, based on a newly-recognized central organizing principle of good faith in contract law.

Moving forward, parties to a residential sales contract have greater protection against one-sided clauses, clauses that in effect convert a contract into an option, and in relation to parties failing to act in good faith.

If you require legal advice or are interested in any aspect of the issues raised in this post, please contact Paul Barbeau at (604) 688-4900 ext. 201, or email me or connect with me on LinkedIn.